Chapter 26
Cost Allocation and Activity-Based Costing
Study Guide Solutions
Fill-in-the-Blank Equations
1. Total budgeted plantwide allocation base
2. Department factory overhead rate
3. Ratio of allocation base usage in a department
4. Total activity-base usage
Exercises
1. Would each description relate to a single plantwide overhead rate method, multiple
production department factory overhead rate method, or activity-based costing
method?
a. Activity-based costing method
b. Plantwide overhead rate method
c. Multiple production department factory overhead rate method
2. Determine if the overhead allocated to the product relates to a single plantwide
overhead rate method, multiple production department factory overhead rate method,
or activity-based costing method.
a. Activity-based costing method
b. Multiple production department factory overhead rate method
c. Single plantwide overhead rate method
3. Would each relate to a single plantwide overhead rate method, multiple production
department factory overhead rate method, or activity-based costing method?
a. Multiple production department factory overhead rate method
b. Single plantwide overhead rate method
c. Activity-based costing
1
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Chapter 26
Strategy: If a company uses a single plantwide overhead rate method, management will
estimate the total factory overhead and total allocation base. The rate found will be
allocated to all products based on the usage of the allocation base. Using a multiple
production department factory overhead rate method, management must go through
the same process, but make estimates for each department. Overhead is allocated to
products based on the usage of the allocation base for each department. Activity-based
costing requires that management determine the overhead costs and the activities
associated with the costs. The rate is applied to the products by the usage of each
activity throughout the production process.
4. Charleston Affair allocates factory overhead using a single plantwide overhead rate
based on machine hours. At the beginning of the year, the company expects to incur
$25,500 of overhead costs for 1,000 machine hours. Machine hours for Product K
production total 490, while Product M requires 400 machine hours during the year.
a. $25.50 per machine hour = $25,500/1,000 hours
b. Product K: $12,495 = $25.50 per machine hour × 490 machine hours
Product M: $10,200 = $25.50 per machine hour × 400 machine hours
5. Wake Coffee Co. allocates factory overhead using a single plantwide overhead rate
based on direct labor hours. The company estimates that factory overhead costs will be
$60,000 and direct labor costs to total $123,750. Employees are paid $8.25 an hour. To
produce the 7,500 units of the Standard Coffee, the company requires 6,275 direct labor
hours, while 10,200 units of Deluxe Coffee requires 8,400 direct labor hours.
a. $4.00 per direct labor hour = $60,000/15,000 direct labor hours
15,000 direct labor hours = $123,750/$8.25 per direct labor hour
b. Standard Coffee: $25,100 = $4.00 per direct labor hours × 6,275 direct labor
hours
Deluxe Coffee: $33,600 = $4.00 per direct labor hours × 8,400 direct labor hours
c. Standard Coffee: $3.35= $25,100/7,500 units
Deluxe Coffee: $3.29 = $33,600/10,200
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Cost Allocation and Activity-Based Costing
3
6. Blair Designs estimates total factory overhead for the year to be $45,000, which is
allocated based on a single plantwide overhead rate per machine hour. The Standard
material requires 1.2 machine hours per yard, while the Print material requires 2.0
machine hours per yard. The company estimates to produce 10,000 yards of the
Standard material and 6,500 yards of the Print material at the beginning of the year.
During the year, the Standard material requires 9,000 machine hours, while the Print
material requires 18,000 machine hours.
a. $1.80 per machine hour= $45,000/25,000 machine hours
25,000 machine hours = (1.2 × 10,000) + (2 × 6,500)
b. Standard material: $16,200 = $1.80 per machine hour × 9,000 machine hours
Print material: $32,400 = $1.80 per machine hour × 18,000 machine hours
Strategy: To determine the plantwide overhead rate, divide the total budgeted overhead
for the period by the total budgeted allocation base. The rate is the amount of dollars to
allocate to each product by the amount of time the product uses the allocation base. To
determine the amount of overhead applied to a product, multiply the overhead rate by
the usage of the allocation base for the product.
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Chapter 26
7. Charleston Affair determines that a departmental overhead rate should be used to
allocate its $25,500 of estimated overhead costs, which can be broken down into
$18,000 estimated to be incurred in the Cutting Department and the remainder
estimated to be incurred in the Finishing Department. Use the following information for
the company.
Product K Product M
Cutting (machine hours)
10,000
14,000
Finishing (direct labor hours)
5,000
7,500
a. Cutting Department: $0.75 per machine hour = $18,000/(10,000 + 14,000)
machine hours
Finishing Department: $0.60 per DLH = $7,500/(5,000 + 7,500) DLH
b.
Allocation Base
Usage
Department Factory
Overhead Rate
Allocated Factory
Overhead Rate
Product K
Cutting Department
Finishing Department
Total
10,000
5,000
×
×
$0.75
$0.60
=
=
$ 7,500
3,000
$10,500
Product M
Cutting Department
Finishing Department
Total
14,000
7,500
×
×
$0.75
$0.60
=
=
$10,500
4,500
$15,000
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Cost Allocation and Activity-Based Costing
5
8. Wake Coffee Co. will allocate $60,000 of factory overhead based upon departmental
rates for its Roasting and Packaging Departments. The Roasting Department is expected
to incur $45,000 of costs, while the Packaging Department is expected to incur $15,000
of costs. Use the information below to calculate the overhead rates for each
department and the factory overhead to be allocated to each product line.
Roasting (machine hours)
Packaging (machine hours)
Standard
10,000
1,300
Deluxe
15,000
1,700
Roasting Department: $1.80 per machine hour = $45,000/(10,000 + 15,000) machine
hours
Packaging Department: $5.00 per machine hour = $15,000/(1,300 + 1,700) machine
hours
Allocation Base
Usage
Department Factory
Overhead Rate
Allocated Factory
Overhead Rate
Standard
Roasting Department
Packaging Department
Total
10,000
1,300
×
×
$1.80
$5.00
=
=
$18,000
6,500
$24,500
Deluxe
Roasting Department
Packaging Department
Total
15,000
1,700
×
×
$1.80
$5.00
=
=
$27,000
8,500
$35,500
9. Blair Designs plans to allocate factory overhead based upon a departmental rate for the
Sewing and Packaging Departments. The company expects to incur total overhead costs
of $45,000, of which management expects 75% to be incurred by the Sewing
Department and 25% to be incurred by the Packaging Department. Use the information
shown to calculate the departmental overhead rates and the factory overhead to be
allocated to each product line.
Sewing (direct labor hours)
Packaging (machine hours)
Solid
2,150
500
Print
5,350
750
Sewing Department: $4.50 per direct labor hour = $33,750/(2,150 + 5,350) direct labor hours
Packaging Department: $9.00 per machine hour = $11,250/(500 + 750) machine hours
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Chapter 26
Allocation Base
Usage
Department Factory
Overhead Rate
Allocated Factory
Overhead Rate
Solid
Sewing Department
Packaging Department
Total
2,150
500
×
×
$4.50
$9.00
=
=
$ 9,675
4,500
$14,175
Print
Sewing Department
Packaging Department
Total
5,350
750
×
×
$4.50
$9.00
=
=
$24,075
6,750
$30,825
Strategy: To calculate a departmental overhead rate, divide the budgeted factory
overhead by the budgeted department allocation base. Each product should receive
factory overhead related to the allocation base usage in each department. Calculate the
allocated factory overhead to a product by multiplying the department’s rate by the
usage of the allocation base in the department, which should be done for each
department. The sum of the allocated factory overhead from each department is the
product’s total overhead allocated.
10. Charleston Affair uses activity-based costing to allocate factory overhead and has
divided estimated costs into: Repairs, $7,500; Assembly, $10,000; and Cleaning, $8,000.
Use the activity-base usage quantities for Product K and Product M to allocate the
overhead. Also, determine the amount of factory overhead allocated to each product.
Product K
Product M
Total
Activity rate
Activity cost:
Product K
Product M
Total
Repairs
(Number of
repairs)
150
350
500
(Per repair)
$15
Assembly
(Number of machine
setups)
28
22
50
(Per machine setup)
$200
$2,250
5,250
$7,500
$ 5,600
4,400
$10,000
Cleaning
(Number of machine
cleanings)
18
22
40
(Per machine cleaning)
$200
$3,600
4,400
$8,000
Product K: $11,450
Product M: $14,050
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Cost Allocation and Activity-Based Costing
7
11. Wake Coffee Co. manufactures two products, Standard Coffee and Deluxe Coffee. The
company estimates total factory overhead of $60,000 for the year, which has been
divided into: Assembly, $20,000; Inspection, $28,000; and Engineering Design, $12,000.
Use activity-based costing and the usage quantities below to determine how much
overhead should be assigned to each product. Also, determine the amount of factory
overhead allocated to each product.
Standard
Deluxe
Total
Activity rate
Activity cost:
Standard
Deluxe
Total
Assembly
(Number of machine setups)
360
440
800
(Per setup)
$25
$ 9,000
11,000
$20,000
Inspection
(Number of inspections)
220
180
400
(Per inspection)
$70
Engineering Design
(Number of
engineering redesigns)
12
18
30
(Per redesign)
$400
$15,400
12,600
$28,000
$ 4,800
7,200
$12,000
Standard: $29,200
Deluxe: $30,800
12. Blair Designs estimated total factory overhead of $45,000 for the year, which can be
divided into: Inspections, $18,000; Research, $12,000; and Supervising, $15,000. Use the
activity-base usage quantities for the company’s two products, Solid and Print, to
allocate the overhead. Also, determine the amount of factory overhead allocated to
each product.
Solid
Print
Total
Activity rate
Activity cost:
Solid
Print:
Total
Inspection
(Number of inspections)
325
300
625
(Per inspection)
$28.80
$ 9,360
8,640
$18,000
Research
(Number of research hours)
175
125
300
(Per research hour)
$40
$ 7,000
5,000
$12,000
Supervisor
(Number of direct labor hours)
700
300
1,000
(Per direct labor hour)
$15
$10,500
4,500
$15,000
Solid: $26,860
Print: $18,140
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Chapter 26
Strategy: First, determine the activity rate by dividing the cost of the activity by the total
activity-base usage. The rate is how much the company will incur each time the activity
occurs. Next, allocate the cost of the activity to each product by multiplying the activity
rate by the number of times the activity occurs for the product. Since activity-base
costing categorizes costs further, it provides companies with a more precise applied
factory overhead cost.
13. Compare the overhead allocated to the products from Exercises 4 and 7 for Charleston
Affair. If the company used a single plantwide rate rather than departmental rates for
each product, what would be the effect on pricing of the products?
Plantwide Rate Departmental Rates
Product K
$12,495
$10,500
Product M
10,200
15,000
Using a plantwide rate would cause Product K to be overpriced and Product M to be
underpriced compared to the departmental rates.
14. Compare the overhead allocated to the products from Exercises 5 and 11 for Wake
Coffee Co. If the company used a single plantwide rate rather than activity-based
costing for each product, what would be the effect on pricing of the products?
Plantwide Rate Activity-Based Costing
Standard Coffee
$25,100
$29,200
Deluxe Coffee
33,600
30,800
Using a plantwide rate rather than activity-based costing would cause the Standard
Coffee to be underpriced and the Deluxe Coffee to be overpriced.
15. Compare the overhead allocated to the products from Exercises 9 and 12 for Blair
Designs. If the company used a departmental rates rather than activity-based costing for
each product, what would be the effect on pricing of the products?
Departmental Rates Activity-Based Costing
Solid Pattern
$14,175
$26,860
Print Pattern
30,825
18,140
Using departmental rates rather than activity-based costing would cause Solid Pattern
to be underpriced and the Print Pattern to be overpriced.
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Cost Allocation and Activity-Based Costing
9
Strategy: When using a plantwide overhead rate, the company allocates all overhead
based upon one rate. Using a departmental overhead rate or activity-based overhead
rate will create a more precise allocation of overhead because different products may
require more time in certain departments, which have different factory overhead rates.
Products may also require certain activities, which cannot be shown using a single
plantwide rate.
16. When determining the amount of selling and administrative expense to each product,
Charleston Affair uses activity-based costing. Two activities related to the selling and
administrative expense are order entry, with expected costs of $7,000, and promotional
support, with expected costs of $5,200. The company expects to receive 400 total
orders and spend 650 hours promoting products.
a. Order entries: $17.50 per order = $7,000/400 orders
Promotional support: $8.00 per hour = $5,200/650 hours
b. Order entries: $3,062.50 = $17.50 per order × 175 orders
Promotional support: $2,480 = $8.00 per hour × 310 hours
17. To determine selling and administrative expenses to allocate to products, Wake Coffee
Co. uses activity-based costing. The company breaks this expense into customer return
processing and shipping and handling, with total estimated costs of $6,000 and $7,000,
respectively. The company expects to receive 200 returns and prepare 350 special
shipments.
a. Return processing: $30 per return = $6,000/200 returns
Shipping and handling: $20 per special shipment = $7,000/350 special shipments
b. Return processing: $1,710 = $30 per return × 57 returns
Shipping and handling: $4,200 = $20 per special shipment × 210 special
shipments
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Chapter 26
18. Blair Designs allocates selling and administrative costs using activity-based costing.
Promotional support and customer return processing are two activities related to the
expenses, with estimated costs for the year totaling $10,000 and $7,200, respectively.
The company expects to send 40 advertisements to promote the products and receive
500 returns for the upcoming year.
a. Promotional support: $250 per advertisement = $10,000/40 advertisements
Customer return processing: $14.40 per return = $7,200/500 returns
b. Promotional support: $3,000 = $250 per advertisement × 12 advertisements
Customer return processing: $2,880 = $14.40 per return × 200 returns
Strategy: Activity-based costing for selling and administrative expenses is prepared the
same as activity-based costing for factory overhead. First, determine the activity-based
rate for each activity that is considered a selling and administrative expense. Next,
determine the amount of selling and administrative expenses allocated to the product by
multiplying the activity-based rate by the number of times the activity must be
completed for the product.
19. A realtor determines that overhead should be allocated to houses using activity-based
costing. Two identified activities include indirect open house expenses and advertising
expenses, which are estimated to have total costs of $4,500 and $25,000. The realtor
estimates to host 300 open houses and send 500 advertisements.
a. Indirect open house expense: $15 per open house = $4,500/300 open houses
Advertising expense: $50 per advertisement = $25,000/500 advertisements
b. Indirect open house expense: $75 = $15 per open house × 5 open houses
Advertising expense: $1,000 = $50 per advertisement × 20 advertisements
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Cost Allocation and Activity-Based Costing
11
20. A painter allocates overhead to clients using activity-based costing. One activity
identified as overhead is the painter’s subscription expense, which is estimated to total
$400 for the upcoming month and will be allocated based on the number of clients.
Another activity is the indirect supplies expenses, which are estimated to total $750 in
the upcoming month and are allocated based on number of rooms painted. The
company expects to service 20 clients and paint 60 rooms.
a. Painter’s subscription expense: $20 per client = $400/20 clients
Indirect supplies expense: $12.50 per room = $750/60 rooms
b. Tom Jones: $57.50 = $20 + ($12.50 per room × 3 rooms)
Ellie Libertino: $45.00 = $20 + (12.50 per room × 2 rooms)
21. A veterinarian uses activity-based costing to allocate overhead to patients. Two
identified activities include the operating room expenses and cleaning expenses.
Operating room expenses of $20,000 for the upcoming quarter will be allocated based
on the hours spent in the operating room, which the veterinarian expects to total 100
hours. Estimated cleaning expenses of $14,000 for the upcoming quarter will be
allocated based on the number of nights the patient spends in the office. The
veterinarian expects to have patients spend a total of 1,120 nights.
a. Operating room expense: $200 per hour = $20,000/100 hours
Cleaning expense: $12.50 per night = $14,000/1,120 nights
b. Operating room expense: $1,000 = $200 per hour × 5 hours
Cleaning expense: $37.50 = $12.50 per night × 3 nights
Total overhead allocated to Fluffy Smith: $1,037.50 = $1,000 + $37.50
Strategy: Activity-based costing for a service organization’s overhead is prepared the
same as activity-based costing for a manufacturer’s factory overhead, but rather than
allocating overhead to products, the organization must allocate overhead to clients or
customers. First, determine the activity-based rate for each activity that is considered
overhead related to each client. Next, determine the amount of overhead allocated to
the client by multiplying the activity-based rate by the number of times the activity must
be completed for the client.
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